Coming up with ideas is easy. Spotting the bad one early is a rare skill.
Today we talk with Yo Shibata serial entrepreneur an investor about how you know if you really have a great startup idea.
We chat about what it was like being acquired by Rakuten, and what can be done to improve M&A in Japan. Yo also talks publicly for the first time about is new startup and why the current B2B SaaS trend in Japan might have peaked and might be about to completely reverse itself.
It’s a great conversation, and I think you’ll enjoy it.
The advantage of launching early on a new platform
The reason for Japanese consumers’ love for points systems
What it’s like to be acquired by Rakuten
The birth of the Tokyo Founders Fund
- The weakness almost all Japanese VC Funds have
- How to know when you ave a good startup idea
- Te importance of “Founder-Market Fit”
- Is this new “anti-SaaS” platform the way forward
- Why most Japanese enterprises are bad at M&A
- The most important difference between Japanese and US startup culture
- Why the ecosystem is more important than the startups themselves
Links from the Founder
- Check out Tailor Yo’s big bet against the SaaS trend.
- … and they are hiring
- Follow Yo on Twitter @yoyoshibata
- Be sure to give a listen to Yo’s podcast START/FM
Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.
I’m Tim Romero and thanks for joining me.
So, how do you know if your startup idea is any good? After all, coming up with ideas is easy, knowing how to evaluate them before spending a lot of time and money, well, that’s that’ a real skill, and we’re going to get to that.
Today we sit down with Yo Shibata, serial entrepreneur, investor, and well-known figure in Japan startup ecosystem. We talk about where Japanese startups are heading and the big bet Yo is making on his next startup. A big bet based on the idea that the current B2B SaaS boom in Japan has got it all wrong.
Now, Yo’s theory flies in the face of all common knowledge about the Japanese market, but as long-time fans of disrupting Japan know, I am a hopeless contrarian. Anyone who can make a compelling case about why conventional wisdom is wrong always has my full attention.
I just love those stories and ideas, and I love bringing them to you.
So Yo and I dive deep into why Japan’s current SaaS trend might be about to reverse itself, and what might take its place. We talk about what it’s like to be acquired by Rakuten, how corporate Japan is getting better at M&A, and of course, how to know if you actually have a good startup idea.
But you know, Yo tells that story much better than I can so let’s get right to the interview.
Tim: So we’re sitting here with Yo Shibata, serial entrepreneur and investor. So thanks for sitting down with us, I really appreciate it.
Yo: Thank you for having me. Pretty excited.
Tim: I’m excited to have you here. And I mean, Yo, you’ve done so much here. You’ve started a number of companies, you’ve started your own fund, you even have your own podcast. It’s a great opportunity to really dig in.
Yo: Yeah, yeah, pretty much.
Tim: Just for background, let’s talk about your startups. There’s been a lot of them.
Tim: Your first one you started in college, right?
Yo: Yes, that was when I was 19 or 20 years old. I started a small company with my friend. It was SEO consulting firm. That was back in 2005 or something like that.
Tim: Was that something you planned on like scaling into a big company or was that just beer money for you and your friend?
Yo: Back in 2005, in Japan, there was no venture capital, especially like seed stage, very rarely saw angel investors. They usually took majority stakes with like, $50,000 or something like that.
Tim: Yeah. And back then, angel investors, they were all doctors or lawyers, they weren’t startup people at all.
Yo: Exactly. And startups didn’t have any bargaining power. And so if they offer $50,000 with half of the company, the only choice is to accept. So that was the situation back then. We had ambition to become big, but there were no knowledge on how to scale a startup. So I don’t know if SEO company is sufficient to go public or not.
Tim: Yeah, I could see that. That’s the kind of, as you know now, I mean, that’s the kind of startup that’s really hard to scale. It scales linearly. As you get more clients, you need more experts.
Yo: Exactly, exactly.
Tim: So after you shut that down, you started Code Start.
Yo: Exactly. So after I left the initial startup, I joined McKinsey, and spent three years as a consultant. And then around 2010, so iPhone launched in Japan and I saw a lot of startups in the US. The AWS was available, iPhones taking off, so there were platform. So it became really easy to start a web service. I left McKinsey and started a small app that enables users to compare price by scanning barcode. It was a good timing, the great timing. I got almost like 1 million downloads when there were only like 4 million devices sold in Japan, so like more than 20% penetration to users. But there were no business model and so I sold that company, then I started a new startup.
Tim: So when you sold it to IMJ, right?
Yo: Yes, IMJ.
Tim: What did they want to do with that product?
Yo: IMJ at the time was basically consulting business then. They wanted their own web service, not B2B but B2C service. They thought our service is good start for them to start direct to consumer like media business.
Tim: So they viewed it as a means of customer acquisition?
Yo: Yeah, I think so. Yeah.
Tim: How did that work out for them? Did it work out?
Yo: It didn’t work out for them. After spending several years, they again sold our service to Opt, I think. There were a lot of users still, hundreds of thousands users but no monetization?
Tim: Yeah. It’s a clever use, people love it but it’s really tough to put a business model around that.
Yo: Exactly, exactly. There were lot of such mobile apps back then, no business model. Even Instagram didn’t have any business model. So that was like–
Tim: That’s true. It was this great experimental time, right? It was all this new technology. We were suddenly walking around with these supercomputers in our pockets. Cloud computing had made spinning up a business super cheap, and the whole world was trying to figure out what to do with it.
Tim: It was fun times.
Yo: Yeah, yea, yeah, it was fun times. For the initial version, I think we only spent $5,000 to develop, and then it got downloaded 1 million times. So that was a crazy time.
Tim: Okay. So after that sale, you dove right back in and you started Spotlight, which was a online points management, right?
Yo: Yes. It’s a location-based service. You go to retail stores and check in and then you earn points just by walking into the stores.
Tim: Yeah. I’ve always been kind of amazed at how powerful the point system is, membership points.
Yo: In Japan.
Tim: Yes. Japanese consumers love these point programs.
Yo: Yeah, exactly, exactly. The interesting thing is that consumers will react, like giving 2% of the purchase demand and give back like 2% points to the customers. Then just discarding 5%, they don’t react, but giving double points, they’re going to buy, so strange.
Tim: This has been researched to death and the consumers even know. They’ll tell you, yeah, that’s not it.
Yo: Yeah, exactly. Yeah. Maybe that’s kind of like gamification or some sort of like, yeah, very interesting.
Tim: So that was rolled into Rakuten’s massive Rakuten point system.
Yo: Exactly, yeah.
Tim: How did that end up? What was the end result?
Yo: It went well. Rakuten at that time, they were trying to launch a new point card to the real retail stores. So they wanted the unique feature to convince retail chain to join their ecosystem. So they used us to penetrate into retail stores, and it was successful. And our company merged with Rakuten Payment. It became also huge for Rakuten. It was a good acquisition, I think.
Tim: I want to get back to your Rakuten experience in just a minute.
Tim: Because the next thing you did after you sold your company to Rakuten, you started the Tokyo Founders Fund.
Yo: Yep. The Angel Investment Fund.
Tim: And that was really unique and interesting at the time.
Yo: Yes, it was.
Tim: For our listeners who aren’t in Japan, even now, but especially in 2015, most funds, the investment committee were finance guys. It was extremely unusual to have anyone with startup experience making investment decisions.
Yo: Exactly. Even now, I think we rarely see venture capitalists with a true real entrepreneurial background.
Tim: Yeah. I think that is one of the weaknesses of Japanese VC in general, the fact that they tend to be really smart finance guys.
Tim: And so there’s a lot of things they overlook. But how was the Tokyo Founders Fund viewed by other VCs?
Yo: Well, we weren’t competing against the Japanese VCs, because we wrote small checks to very early stages, and we focused on overseas investment at the time. It was very welcomed. I think Japanese startup community, including VCs are very supportive of successful entrepreneurs funding and helping the next generation of entrepreneurs.
Tim: Do you think there was a lasting impact? It seemed to me it had such potential to change the way VCs looked at investment.
Yo: Yeah, I hope so. I hope we had some impact. And also timing-wise, around that time, a lot of young entrepreneurs went public or got acquired and had some cash to invest in — angel investing became kind of became mainstream in Japan, angel investing by successful entrepreneurs. And I think Tokyo Founders Fund was very symbolic of the times. It played a role model, I think, you know, young entrepreneurs investing into the next.
Tim: So here we are seven years later, has much changed?
Yo: I think so, yeah. A lot of young tech founders or co-founders or like early employees got rich by taking the company public. So there was kind of a boom of angel investors.
Tim: Yeah, there has been a lot more smart angel investment, experienced angel investment that’s coming to Japan, people with actual startup experience investing.
Yo: Yeah, yeah, yeah.
Tim: Yeah, that really has changed in the last five, six years. But what about the VC side? I feel like I’m still not seeing many founders on investment committees.
Yo: No, it’s pretty rare, I think. I don’t know the reason. I don’t know why, but it’s gradually changing, I think, at least for the seed round there are some super angels or angels with bigger checks. They could compete against early stage VCs, or they could give us some peer pressure to VCs. And then if those people are on the cap table of startups, even for the later rounds, they can provide some advice or give some pressure to later stage VCs. You know, the startup community is reputation-based.
Tim: That makes sense. So even if the VCs themselves aren’t changing, the whole funding ecosystem has changed so much.
Tim: And we get the same result. Oh, that’s cool. Hey, do you want to talk about your new project, or is it too early?
Yo: It’s kind of early. Maybe it’s the first time that I talk about my new project.
Tim: Oh, awesome. We got to hear about it.
Yo: After I left Fortnight, after the company got acquired by Rakuten, I spent almost six years looking for my next project. The reason I spend that much time is based on my experience, I thought it was pretty important which domain to pick, which industry to pick, which idea to pick, and it determines a lot. People should be more aware about idea-picking phase, market selection and timing.
Tim: Founders always get asked, how do you come up with ideas, which I always think is the wrong question.
Tim: It’s easy to come up with ideas, right?
Tim: The better question is like, how do you personally filter your ideas?
Yo: Good question.
Tim: What’s the criteria you use to say, “Okay, now, these three ideas aren’t worth working on right now”?
Yo: Mainly two aspects. First is the timing of the entry. So every market has entry window that allows new small companies to enter the market and become successful, become like a rapid.
Tim: So you’re trying to like identify a growing market that’s still early?
Yo: Yeah, exactly. Not just growing but changing market. Something has to change for the market to allow new entrants to challenge and become a dominant player in the market. Something has to change, so that’s one thing. And the other thing that I realized recently is founder market fit. Yeah, I tend to ignore that, but in the end I thought it was pretty important. So founder market fit means is the industry or business model has fit with my skills or my characteristics?
Tim: I agree that is just so, so important, even from my own experience. All of my startups that have been even moderately successful have been enterprise SaaS software. That’s what I know. That’s what I’m good at. I’ve experimented with other things that have evolved, ad sales, and you know, it hasn’t worked out for me.
Yo: Right, right, right.
Tim: I think that’s super important. You got to realize what you’re gifted at, right, and don’t fight it.
Yo: Exactly, don’t fight it. Because sometimes you’re tempted to try new things or like, you know, B2C, pure web services, like cool, like your social network is cool, kind of video streaming services cool. But if you don’t have fit, you’re going to suffer.
Tim: Yeah, every founder needs to bring some kind of core insight to what they do. It’s not just passion. There’s something you have to see that others aren’t seeing.
Yo: I agree. I agree.
Tim: I don’t want to push. I’m happy to edit out that other part. If you’re if you’re not ready to talk about the details, we don’t have to.
Yo: The new project? So the new project is that it’s a B2B software company. It’s kind of backend as a service platform, backend for business applications, for example, CRM, HR management, expense management, workflows, those kind of business software’s that’ll be used in large enterprises. Large enterprises, their requirement is very complex, so they tend not to use off the shelf packaged softwares or SaaS.
Tim: This is interesting. So it’s basically creating a SaaS-like platform but something that’s highly customizable.
Yo: Exactly, yeah.
Tim: I don’t know. I think that’s super interesting in Japan. B2B SaaS is huge in Japan just because, oh, enterprise IT in Japan is pretty out of date. But yeah, from all the B2B SaaS, the consistent pushback from their customers is lack of customization. And when they lose sales, it’s because yeah, they can’t customize. So no, I like the positioning of this. I like it.
Yo: Thank you very much. Yeah, exactly, so Japanese corporation, especially large enterprises, I don’t know why but they don’t want to change their processes. They just want a system that fits their processes. So it’s the other way around. The concept of SaaS is taking the best practice of the industry and translate that into software. And if you use this software, your process could become the industry best practice. But for whatever reason, Japanese company doesn’t like it.
Tim: I don’t know. I think there is a core insight there. So if we look at the original SaaS company, right, Salesforce. Salesforce is not, today, a one size fits all, it’s this incredibly customizable–
Yo: Exactly, yeah. I think Salesforce is the only company that has this core insight. I think they are brilliant. The Salesforce is a brilliant company. As I said, they’re copying superficially like Salesforce concept, but actually it’s not that well thought out.
Tim: Yeah. Salesforce pretty rapidly moved from being a one size fits all, no software plug and play SaaS, to a enterprise platform.
Yo: Exactly, yeah. And they are still trying to become more and more customizable. Yeah. Maybe like Microsoft and other big platform companies gets it but not like Japanese SaaS company. They are just selling products.
Tim: And that gives you a great go-to market using system integrators as a channel because they need something like this?
Tim: Oh. Yo, we’re going to have to get you back on the show like in about a year, because I want to know how this turns out.
Yo: Let’s see, let’s see. Yeah, it’s a long game. I think it takes time to build such kind of platform. It takes time to convince not only enterprises, but also this vendor ecosystem, like partner companies. It’s going to take a while. And also we have to find some niche that Salesforce and Microsoft are not interested in. But yeah, we’ll figure that out.
Tim: Let’s back up again, I want to ask you about some of the mergers and acquisitions. For example, when Rakuten bought Spotlight, did you in the team move to Rakuten, or is it more of just a asset sale where you gave them the keys and they drove it away?
Yo: It was acquisition, including the team. So we joined Rakuten. I spent two years as acting subsidiary company CEO.
Tim: How did that go? Because I know from my own experience of Digital Garage buying my company, it was rough. I mean, they were wonderful people and all, but just the difference in cultures was just extreme, and it was hard on my team. So how was your experience?
Yo: Yes. My experience wasn’t so bad. Rakuten has already acquired more than 100 companies, and they have a ton of knowledge about post-merger management. Decision I regret was that for the first year, we didn’t move our office in Rakuten’s office, so we had separate office. I thought it was a good idea, having less impact on employees.
Tim: Yeah, less jarring.
Yo: But that led to not only two types of employees, but three types of employees. So one is obvious, it’s early members, people who joined when we were just a startup, not a subsidiary of Rakuten. And after full integration, we all moved to Rakuten Tower, and people who got hired after that is Rakuten’s employee. They are very clear about the identity. But the problem is people stuck in the middle, like we were already acquired so there’s no upside, but they had a different office, different work rules, and all that.
Tim: Yeah, and I’m sure Rakuten had a much nicer office.
Yo: Exactly, yeah. So that was a bad decision. I should have moved more quickly.
Tim: But that’s a hard call to make. I mean, I’ve heard it go both ways.
Tim: I mean, it certainly makes sense that it’s better to integrate the teams, avoid this different class of employer feeling. But I’ve also talked to founders who after their company was acquired, really valued that independence, really needed that independence to function. So it’s a hard thing.
Yo: Exactly. But the question is like, how long are you going to be independent?
Tim: Yeah, you got to do it eventually, right?
Yo: Yeah, exactly.
Tim: Now, Rakuten is a good example, as you mentioned, they’ve done how many M&A’s do you think they’ve done?
Yo: More than 100.
Tim: Okay. They figured out what works for them. I think most companies, it’s still pretty new, and it’s hard a lot of times, founders their first day, it’s like, okay, you’re now reporting to this bucho.
Yo: Yeah, yeah, exactly. I think the difficulty, especially a Japanese executive, even like board of directors, their incentive is not designed to take risks. So they don’t want to fail. But you know, M&A is a high risk deal, it’s highly likely that the deal fails. I think that’s the main problem.
Tim: Yeah, it is. I think that desire to fit the startup into a traditional management chain, that managing to avoid failure at all costs, it’s really hard for a startup team to do.
Tim: Listen, along that theme, can you talk about some of your own failures, some of the projects you started but didn’t work out like you expected?
Yo: There are many. So I tested a TikTok-like video-sharing platform, like maybe 2019 or something, didn’t work out at all. It’s kind of very difficult, very competitive. And the users expectation to experience went so high, so, so high, I think it’s only geniuses could pull off that kind of–
Tim: But I also think there’s some point of luck to it, too, because you mentioned the TikTok idea. Do you know I’m Hirano Miku from Cinnamon?
Jonathan: Yes, of course, of course.
Tim: She had a failed startup that was TikTok idea before TikTok and couldn’t make it work.
Yo: I don’t know if it’s only like, maybe it has to do with the way to do it or like small features. Of course, luck plays a big role.
Tim: Yeah, I think so. I don’t like this whole idea of celebrating failure, because failure sucks and that’s fine. And it does, you know, it’s not fun.
Yo: Yeah, not fun.
Tim: But I think new founders would be better prepared if they understood even the successful serial entrepreneurs, it’s a very small percentage of the projects that actually become successful.
Yo: Yeah. Pivot is always a necessity, I think. Also, really important to stop and quit, close the project if you think it’s not working early on.
Tim: Can you tell me a time where you’ve had to do that, because that’s a hard decision to make.
Yo: Yeah. So there’s always this kind of point of no return event. Everything before that, you should stop if you think it’s not working. I think responsibility as a founder is to delay as much as possible that point of no return.
Tim: So what’s an example?
Yo: Outside investment, hiring a full-time employee that you can’t let go of easily. If it’s very high-skilled city or something that you can always stop and let him go because he doesn’t have any job security issue. But if you hire like three new grads, I think it’s–
Tim: I get that. You’re saying when you feel responsibility for other people.
Tim: So yeah, if you hire a bunch of people who need this salary to eat, that is a responsibility. If you take money from a VC, you have agreed to play the game a certain way, and you’ve got that responsibility. Yeah, that’s a good way of thinking of it. And I think yeah, I think in my own shutdown startups, it’s always been something like that, because it forces you to look at yourself and like, do I really think I can pull this off?
Yo: Right, right, right.
Tim: Hey, you spent some time in San Francisco, right?
Yo: Yep, and New York.
Tim: Yeah. And just to kind of like be there and learn and see how things are done.
Tim: What’s the most important thing you learned from the US and brought back to Japan?
Yo: Good question. There are so many participants to this startup game in the US. The competition is maybe 10 times harder. On the other hand, maybe the prize if you win the game is more than 10 times, maybe 100 times. So that’s worthwhile but it makes sense, but the sheer number of people who are trying to join the entrepreneurial game, I think it’s the core difference. That means more challenges, more extreme ideas, because you have to differentiate with others, more kind of winner takes all situation.
Tim: Yeah, that’s true. That pace is so much faster in the US.
Tim: It is this relentless pace.
Yo: It’s relentless, yes. Yeah, it’s the biggest difference, like fundamental difference.
Tim: Is that good?
Yo: I think it depends how you like competition. It’s way easy to be successful in Japan because of the number of competitors, but it has its own limitations. Rarely there’s startup that goes global because Japan market is kind of unique.
Tim: Yeah, that’s certainly true. I mean, you can’t you can’t take us startup culture and just bring it to Japan. It won’t work.
Yo: Right, right.
Tim: Culturally and institutionally, it’s just different. Universities play a much bigger role in Japan, enterprise, companies play a much bigger role in Japan.
Tim: But what do you think we should be doing? What could we do to strengthen this startup ecosystem in Japan, either something coming from the US or just something that should be done?
Yo: More people studying companies, that’s one.
Tim: Just more people getting out there and doing it?
Yo: And the other thing is more people who are willing to accept changes, generally speaking, both consumer and business buyers, because they are very conservative in terms of decision-making. It directly reflects on sales cycle. Let’s say like sales cycle is three months in the US, maybe it takes 9 months or 12 months in Japan, just that kind of decision-making, it slows down everything.
Tim: That is true. Yeah, I think that that’s one of the biggest advantages of having a real startup ecosystem in Japan now. Like during the.com. boom, there were plenty of startups but they were all either selling to consumers or to enterprise. But now the ecosystem is big enough, a lot of startups are selling to each other. Innovation will get adopted quicker and like the use cases and success cases can happen faster. And then they can take it to the enterprise and say, see, we’ve got these customers, they’re very happy. So I think that’s been a really good positive change.
Yo: Exactly. Especially we are seeing it in online businesses, mainly e-commerce, a lot of online businesses started very recently. So a lot of the managers in those businesses have very progressive mindset. On the other hand, very old industries, it’s still the same. So we need more people challenging that kind of industries.
Tim: So for you, I mean, definitely more people starting companies, but what kind of startups do we need more of or what kind of startups do we need less of?
Yo: What I’m seeing right now, my background work, I’ve been to consulting firm, I’ve worked in McKinsey, so current junior member in McKinsey, they really want to start a new company, they really do, it has changed a lot. But the problem is that they can’t find ideas. Of course, idea generation is tough, so my solution is that first, we have to turn around the old industry, make them accept, for example, IT tools, not using pencil and paper or fax machines.
Tim: So just the basic digital transformation.
Yo: Yeah. And to do that, the incentive needs to be created. The best way is maybe to acquire those old small businesses and then consolidate, roll up, and then they get public or sell to another private equity kind of players.
Tim: What kind of businesses, what kind of industries are you on?
Yo: Everything, everything, everything. I am seeing very early trend, small M&A’s below $10 million, very small companies like a small manufacturer or even like cleaning, laundry business, very small, turn it around and then buy another company maybe and merge two of them and then sell it to private equity. It starts this cycle of productivity improvement.
Tim: Yo, I mean, that’s certainly has been a successful trend over the last 20, 30 years in the United States.
Yo: Yeah, yeah, yeah. And then like simultaneously, we can have new services to provide solution for those type of companies.
Tim: Yeah. Get economies of scale happening.
Tim: All right. Well, it sounds like your overall outlook is pretty positive for the future of Japan here.
Yo: Yeah, yeah, overall, yeah.
Tim: Hey, well, listen Yo, I want to thank you so much for taking the time to sit down with me. I really appreciate it.
Yo: Likewise, it’s my pleasure.
And we’re back.
There were two points Yo raised about innovation that I really loved.
First, I loved Yo’s framing of founder market fit. Sure, great managers can execute in almost any industry. But great founders, they need an understanding and insight into the industry they want to disrupt. You need to be able to see something that others don’t.
Second, is the importance of the innovation trigger, the innovation platform. Smartphones and cloud computing emerged at about the same time, and that blew open the doors. It created an innovation platform that allowed us that, no, that really forced us to rethink the way we do almost everything. And we saw the same thing when personal computers and the Internet formed the innovation platform that fueled the dotcom boom.
But getting back to Yo’s new project, SaaS as a configurable, fully customizable platform, rather than a low cost, low maintenance streamlined system. It’s certainly going against a very strong industry trend and all conventional wisdom, but can it work?
Well, yeah, maybe.
I mean, on the risk side, Yo seems to be attaching himself to an inefficient market, and that could put the venture at risk of shrinking margins, lower budgets and higher risk aversion in general. Many enterprise customers are actively trying to reduce their dependence on systems integrators right now.
On the other hand, those are very long-term trends. In the short and medium term, there will probably be a lot of demand from system integrators who need something like this to counter the business, they’re losing to SaaS competition. So there will be plenty of time for Yo and the team to pivot and align to long term trends once they have a good user base.
Or, of course, to simply continue as planned if Yo’s theory about the long term success of SaaS turns out to be the correct one.
It’s a very interesting move, but one thing is absolutely certain. The first startup to enter the market with a customizable SaaS platform like this has a far better chance of success than the 10th startup who enters the market with a “me too” HR management SaaS platform.
And that’s not just the hopeless contrarian in me speaking, that’s just good common sense marketing and positioning. Innovation is about bringing something new into the world.
Innovation is about doing things differently.
If you want to talk more about SaaS and the future of startups in Japan, Yo, and I would love to hear from you. So come by disrupting japan.com/show190, and let’s talk about it. If you leave a comment, I guarantee Yo or I or maybe both will respond.
And hey, if you like the show, tell people about it. In this age of omni channel advertising and reviews as a service, you’d be absolutely amazed how much power your honest recommendation really has.
But most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.
I’m Tim Romero, and thanks for listening to Disrupting Japan.